This post is so good I cannot wait reading all the comments to post my own. Why don’t more people get it. TANSTAAFL. Even typing this post is extremely frustrating, knowing all the fancy bullshit that is being peddled by people who somehow end up in positions of power. Even writing it down to explain what is going on is making me despair. A real world exists. Supply and demand exist. Being disciplined and doing a good job at something that is in demand is all we need to do. Prices will equilibrate and direct us to the most useful enterprises. There will always be some people looking for other things to do at different places, people entering and exiting the formal economy. What government does is mess tremendously with this optimizing system. It creates expectations that can not be fulfilled, it twists incentive structures so wasteful activities are undertaken, it prevents readjustment after errors, it rewards profligacy, sloth and dependency. It claims to have superior knowledge and crudely destroys carefully saved caches by prudent citizens. It slowly saps the spirit, dampens creativity and limits our freely chosen options by forcing a suffocating blanket of cowardly tyrannical bureaucrats on us. All for our own good. So we can have “free” (compulsory) “education” (as determined by our betters in government) and “free” “health services”, which will slowly encompass all activities in our lives, because, surely, everything we do is related to our health and longevity. What a nightmare.

“Keynes offers us the best way to think about the financial crisis” (but only if you lack imagination, integrity, courage and intelligence, or if you work for the pro-government cathedral. Those two qualities often coincide.)
The ghost of John Maynard Keynes, the father of macroeconomics, has returned to haunt us. With it has come that of his most interesting disciple, Hyman Minsky. We all now know of the “Minsky moment” – the point at which a financial mania turns into panic.-Why might this be? Because classical liberalism does not allow interventionism. Given that the cause of the current crises is interventionism (subsidized government-backed housing loans, a federal reserve, fiat money fractional reserve banking system, all packed in a crazy system of webs of regulation and random rule-changes and market participants trying to optimize within and around this crazy system), why would you suddenly revert to classical liberalism when your system doesn’t function as expected? The answer, of course, is MORE intervention. You can call this Keynesianism, but in the end it is the same old story. Government using anti-freedom arguments to explain its own failure to expand itself. Keynesianism is the pseudo-intellectual ammunition that shrouds this all in a respectable aura.
Like all prophets, Keynes offered ambiguous lessons to his followers. Few still believe in the fiscal fine-tuning that his disciples propounded in the decades after the second world war. But nobody believes in the monetary targeting proposed by his celebrated intellectual adversary, Milton Friedman, either. Now, 62 years after Keynes’ death, in another era of financial crisis and threatened economic slump, it is easier for us to understand what remains relevant in his teaching.
I see three broad lessons.
The first, which was taken forward by Minsky, is that we should not take the pretensions of financiers seriously. “A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him.” Not for him, then, was the notion of “efficient markets”.-That’s right. Bankers are government backed predators, destroying free markets and capitalism. I don’t blame the bankers, but government for allowing this system to exist and for calling it a “free market”.
The second lesson is that the economy cannot be analysed in the same way as an individual business. For an individual company, it makes sense to cut costs. If the world tries to do so, it will merely shrink demand. An individual may not spend all his income. But the world must do so.-So much confusion in this paragraph. “The world must spend all its income”. How so? There are individuals out there that are producing goods and services. (let’s ignore the non-sense “produced” through government subsidies and bureaucracies, which, alas, are often the cause of the trouble). When these individuals readjust their predictions for the future, they might save more instead of spend. They like to have a little stack of goods to protect them from future scarcity and high prices. The size of this stack of goods depends on expectations. Obviously after a huge change in expectations, people will expand this stock and spend less, probably on frivolous goods. People earning their living making these frivolous goods will have to adjust towards more valued activities, helping to increase the stock of “preparedness” goods. Of course, these people might not be able to find a job they like, and go on government handouts or join the government bureaucracy, further driving down the wealth of the more productive people.
The third and most important lesson is that one should not treat the economy as a morality tale. In the 1930s, two opposing ideological visions were on offer: the Austrian; and the socialist. The Austrians – Ludwig von Mises and Friedrich von Hayek – argued that a purging of the excesses of the 1920s was required. Socialists argued that socialism needed to replace failed capitalism, outright. These views were grounded in alternative secular religions: the former in the view that individual self-seeking behaviour guaranteed a stable economic order; the latter in the idea that the identical motivation could lead only to exploitation, instability and crisis.

– A stable economic order is very much UNLIKE what the austrians think human activity looks like. However, they DO think that having individuals pursue their activities freely leads to the best way to adjust to ever-changing circumstances. A constant re-optimizing and flexibility embraces INstability, and is thus best able to cope with the changes inherent in an unpredictable existence. Socialists haven’t solved that problem yet. They think that government can better cope with the unknown, but it cannot. It fails miserably and at great cost, again and again.
Keynes’s genius – a very English one – was to insist we should approach an economic system not as a morality play but as a technical challenge. He wished to preserve as much liberty as possible, while recognising that the minimum state was unacceptable to a democratic society with an urbanised economy. He wished to preserve a market economy, without believing that laisser faire makes everything for the best in the best of all possible worlds.
– The Austrians do not engage in “morality play”. Von Mises Socialism is a technical refutation of the socialist arguments. That the idea of a free individual is also at the heart of our western identity and is philosophically desirable is a very important part of the freedom philosophy that is anti-state intervention, but also on purely “technical grounds” the austrians win the debate. If you can call coping with uncertainty and imperfect knowledge technical, that is. Recognizing the limits of our ability to doctor solutions is a way to cope with the limits of our technical planning abilities, something that those “concerned with the common good” do not like to hear. They want new school buildings, spending and taxing, plans, highways, education, and whatever is on their wish-list for santa.
This same moralistic debate is with us, once again. Contemporary “liquidationists” insist that a collapse would lead to rebirth of a purified economy. Their leftwing opponents argue that the era of markets is over. And even I wish to see the punishment of financial alchemists who claimed that ever more debt turns economic lead into gold.

– If you ran a business soundly, you are still in the running. Only fools have failed in this crash, and that includes the banking class, which has been exposed for what it is: a big fraud, legitimized by their cozy relationship with government (money is government money after all) and central banks, enjoying an aura of respectability (now forever tarnished, luckily), and somehow being called “capitalist”, as if being at the heart of our wealth. No, individual entrepreneurs and their outgrowths, companies (not too big too fail) that try to make a profit, and do so consistently when left alone in good and bad times.
Yet Keynes would have insisted that such approaches are foolish. Markets are neither infallible nor dispensable. They are indeed the underpinnings of a productive economy and individual freedom. But they can also go seriously awry and so must be managed with care. The election of Mr Obama surely reflects a desire for just such pragmatism. Neither Ron Paul, the libertarian, nor Ralph Nader, on the left, got anywhere. So the task for this new administration is to lead the US and the world towards a pragmatic resolution of the global economic crisis we all now confront.– “Managed” with care? Markets need to be managed? Financial markets need to be UNmanaged by abolishing the central banks and govt. money. Then a new and healthy system will spring up (although there will always be those on the lookout the re-nationalize it all.). Ron Paul didn’t get anywhere because democracy is mostly a sham. If enough people depend on government, it perpetually expands and fortifies itself instead of serving the true good of mankind, which is preserving individual liberty. In this way, the meek can safely enjoy the fruits of the individual risk-takers who are constantly out there in the real world, fighting uncertainty and producing value. Obama is the ultimate expression and the final collapse of the last free government on earth, which has consistently been undermined throughout the twentieth century Now, the tax-dollar paid technocrats and their voter blocks are in charge. An American Democracy led by an almighty American Administration, administering to the needs of the People.
The urgent task is to return the world economy to health.

– No. We all have our individual task of taking care of our businesses as best we can. If we are truly optimistic and generous, perhaps we can battle tyrannical governments at home and abroad who prevent us and others from doing so.
The shorter-term challenge is to sustain aggregate demand, as Keynes would have recommended. Also important will be direct central-bank finance of borrowers. It is evident that much of the load will fall on the US, largely because the Europeans, Japanese and even the Chinese are too inert, too complacent, or too weak. Given the correction of household spending under way in the deficit countries, this period of high government spending is, alas, likely to last for years. At the same time, a big effort must be made to purge the balance sheets of households and the financial system. A debt-for-equity swap is surely going to be necessary.– Yeah, why not. Government institutions messed up. Tax-payers will get more government as a response, after having bailed out the frauds on wall street. Given that we are poorer now, we should “sustain aggregate demand” to the level it was at the time we thought we were richer. Sounds smart! Yes we can! On printed dollars and higher taxes everything is possible..
The longer-term challenge is to force a rebalancing of global demand. Deficit countries cannot be expected to spend their way into bankruptcy, while surplus countries condemn as profligacy the spending from which their exporters benefit so much. In the necessary attempt to reconstruct the global economic order, on which the new administration must focus, this will be a central issue. It is one Keynes himself had in mind when he put forward his ideas for the postwar monetary system at the Bretton Woods conference in 1944.– When people will not be bailed out if they make mistakes, they will stop taking on enormous levels of debts. The rebalancing is what is happening now, and does not need to be forced. The readjustment should not be PREVENTED though through more government waste.
No less pragmatic must be the attempt to construct a new system of global financial regulation and an approach to monetary policy that curbs credit booms and asset bubbles. As Minsky made clear, no permanent answer exists. But recognition of the systemic frailty of a complex financial system would be a good start.

– First line of sense is the last one here. The FINANCIAL SYSTEM is FRAGILE. It is NOT a “free market” and it is HIGHLY susceptible to boom-bust cycles. That is another lesson of the Austrians, who have consistently argued that it is the government-approved and sustained central bank financial system that is destroying the last vestiges of individual freedom by giving ever more arguments to take on MORE government power.
As was the case in the 1930s, we also have a choice: it is to deal with these challenges co-operatively and pragmatically or let ideological blinkers and selfishness obstruct us. The objective is also clear: to preserve an open and at least reasonably stable world economy that offers opportunity to as much of humanity as possible. We have done a disturbingly poor job of this in recent years. We must do better. We can do so, provided we approach the task in a spirit of humility and pragmatism, shorn of ideological blinkers– co-operate? ideological blinkers? selfishness? AH! we must SHED OUR SELFISHNESS! What a great plan for improving the world. How many degrees do you need to come up with that? How much selfishness must we shed? 40%, 50%, 60%, heck, why not 99% on all income over 50,000$. That way government can fix all our problems through the intelligent application of sound policy. And by building new school buildings. Yeah right.
As Oscar Wilde might have said, in economics, the truth is rarely pure and never simple. That is, for me, the biggest lesson of this crisis. It is also the one Keynes himself still teaches.– Who gives a crap about Oscar Wilde. Quotes are for facebook. The truth is pure and simple, but only after wading through the morass of modern government’s institutional layers. There is no utopia, and striving for it through government will destroy us. Only individual striving, cooperating and competing can lead consistently to improvements. At best government can protect this system of individual rights by protecting its infrastructure through sound laws protecting individual rights and by having a strong security force which wards of covetous neighbors and maniacs. At worst government morphs into the default solution to all our problems, legitimized through the myth of majority democracy, it’s failures masked by the continued improvements that take place outside of its claws, although these expansions of the possible have increasingly less room to freely grow without constraint, the soil from which the flowers grow now barren, its precious sunlight blocked, and a cold wind blowing over its fields.

If this guys is our mainstream voice, we’re screwed. Yes, we’re screwed. The socialists are in charge now. At least it’s out in the open now, with the banks still having legitimacy the argument was always harder to make that we did not have a free system. Now, we are in the opposition. For the unforeseeable future. Rhodesia, Beautiful Rhodesia..

We’ll preserve this little nation, for our children’s children too. Once you’re a Rhodesian, no other land will do. We will stand to all in the sunshine, with the truth upon our side. And if we have to go alone, we will go alone with pride.

Cause we’re, all Rhodesians and we fight through thick and thin. We’ll keep our, land a free land, stop the enemy coming in. We’ll keep them North of the Zambezi, till that river’s running dry. And this mighty land will prosper, for Rhodesians never die.

One of the most predictable charges caused by the current banking failures is that the crisis is due to unregulated markets and “market fundamentalism”. Because of lax government oversight, investment banks were able to design nefarious scary financial instruments, filling the pockets of overpaid bankers while endangering everyone of us with their financial alchemy. Therefore, these practices should be banned and this was a clear case of the market coming up with stuff that is dangerous for all, thus: market failure.

This charge is understandable. However, it is false, because it assumes the current system was a “free market” system. Certainly it wasn’t. The non-market factors that lead to the crisis:

– The existence of a federal reserve with government mandated currency, the fiat dollar.

– The existence of a banking system based upon rules set by the government, handling this government created fiat dollar. The existence of fractional reserve banking, whereby deposits and withdrawals are hugely amplified in times of crisis is key here. However, presumably that’s why we have a Federal Reserve in the first place: to prevent a crisis of withdrawals occurring in a system that inherently gives rise to these withdrawals. Interesting.

-The existence of financial institutions besides the regulated banking sector coming up with legitimate innovations, but misused by the REGULATED banking sector. They used these instruments while they were supposed to have minimal capital requirements. Rating agencies who provide these ratings (which only the government regulated sector cares a damn about, to satisfy their regulatory requirements) hugely misjudged these instruments.

– Fannie <ae, Freddie Mac. Government forced loans to people who cannot afford them, on a tremendous scale . A federal reserve printing money, providing cheap loans, causing a boom in the asset where these cheap loans went (housing), accelerating the bubble, and worsening the eventual bust.

– The existence of a government happy to put tax-payer money in any place of the above, because the whole ridiculous system is now “too big to fail”.

Finally: A bunch of socialists calling this system the “free market”, calling the failure of this grotesque sick government mandated horribly unstable system “market failure”, and basically calling any classical liberal a fascist and profiteer and ideologue.

Disgusting.

We now live in the USSA, where there is socialism under the name of capitalism, which is happily blamed by the left-wing university indoctrinated population, and with the defenders of liberty unable to explain the difficult mess, leading to even worse socialism. Lenin and Marx couldn’t have designed a better Orwellian paradox themselves.

What is the alternative then? The seventeenth century Dutch Republic, the United Provinces, provide some lessons.

The foundation of the new system should consist of heavily regulated and controlled 100% reserve “deposit” banks that serve as “girobanks” to transfer money. The money should be a commodity-money, perhaps best a commodity-basket of Gold, Platinum, or what have you. This would be a risk free storage and transfer facility. At market rates this bank will provide currency-exchange at cost.

Whatever springs up besides this core is irrelevant. There will always be risk and uncertainty, since we are mortal human beings proceeding through time and an unpredictable changing space, giving rise to an uncertain future. This uncertain future people will try to anticipate and people will make financial (amongst other) bets on this. The total of this future-market will make us adjust our current behavior as least worst as possible to future predicted circumstances.

There will be investment institutions that should be forced to display the amount of value in their vaults or wherever it is. Accounting takes care of that. People will serve as a check on whether to put their money in these institutions, and will bear their own risk. These investment institutions can do deals with each other in any way they want — the public will choose investment institutions that match their risk/reward ratios. These institutions will in no way have anything to do with the central bank. Calling them an investment “bank” would be very very wrong.

There will be lend-borrow institutions that simply match lenders and borrowers, who will assume their own risk. Nothing fancy here.

There will still be mistakes made, and money lost, and there might still be huge systemic misjudgements. But there is no way to improve upon that. If there was, if someone somehow knows better than individuals doing what they think is best for them, it would be a dictatorship. Regardless, people will know where their money is, the tax payer will never be used in a bailout, and systemic risk will be as low as is possible.

There will be market “failures”, as humans are fallible. But having people bear their own risk will minimize failure.

We need to separate the two functions of financial institutions. 1)Transfering, storing and safekeeping of value. and 2)placing value in a risk/reward position that you prefer over the safety of 1).

Mixing these two up, with a nice big government hugging us to death from behind, (too big to fail?) will mess us up< REAL GOOD.

Even better when it’s left-wing obama-buddies Franklin Raines and James A. Johnson timing the revealing of information to coincide with the election-campaign’s last stretch.

Down with the tie-wearing economists, the overpaid liars and charlatans of wall street, the jargon using peabrains, the “policy” makers, those talking about “institutions and the global economy”, and stay OUT of our lives, get RID of the federal reserve and all its offshoots, 100% backed gold standard, out with fractional reserve banking, get RID of 90% of the federal government, and get back to the job of protecting us from barbarians within and without our borders. That especially includes Ben “crashed helicopter” Bernanke and Demented Paulson.

Down with the regulators, corporatist crooks, socialists, and other traitors to American liberty. Recall the military and give the socialist/corporatist cities a good clean wiping with our honorable combat brigades.

Taking a look at the world’s largest companies one thing hits home. This is it. This is all that stands between us, the defiant and determined shapers and creators, and violent attacks upon us by nature and superstitious, destructive, and jealous man. These are oil companies that extract and provide the fuel to propel our bodies through space and transport our foods and tools to each other. These are pharmaceutical companies that invent complex medicines in lifelong projects to prevent our bodies from decay and constant attacks by a violent nature, to heal wounds sustained by attacks of enemy humans and natural catastrophes, or perhaps even halt the process of natural aging. These are engineering companies, that design and construct the rolling, flying and floating vehicles that safely transport us and our tools through our hostile environment, while lighting our environment in the dark night. These are food companies, that produce the foods that sustain our bodies and give us our vital energies, that experiment with the foods to make them as pleasant to us as possible. And yes, these are also financial companies, that direct our currency units of abstract value around and coordinate and search for the highest possible values through space and time. These last companies are currently our weakest, because they are inherently extra unstable, since not only the value units are manipulated through fractional reserve banking, government fiat money, and a central bank with regulators, but also they are still stumbling along, discovering optimal processes as we advance through time adapting to an ever-changing environment.

The financial sector should be our ultimate tool, where value is directed toward optimal risk-return projects, trying to predict the small invisible hands of the consumers and using a firmer, stronger hand to guide the flows of value to where they are best situated to deal with future demands. The best brains take accumulated wealth, and guide and handle it in such a manner that they will profit from it and through their profits serve to stabilize and secure our larger system of emergent order. Now, however, this system is driven to collapses by its inherent instability because of government meddling. The system would occasionaly fail in its predictions if left alone by government, and on a stable commodity currency with consumers keeping a check on the value of the deposits and loans, which would also be separate functions clearly delineated in contracts, but currently because of the immense added uncertainties because of government enterprise upon, within and flanking the system that is most vulnerable to it, because of the natural interconnectedness of the now unpredictable value-units, the sheer size of failures taking place threaten to undermine the larger culture of property rights, production and invention within a larger order of competing and enterprising human animals.

Our tribal striving for recognition, our attraction to combat and physical competition, our world of scarcity, our superstitious universe-views, our jealousies and group-tendencies, our lack of knowledge in the face of the immense uncertainty we daily confront, and ultimately our nature as mortal animals requires that we channel this violent internal and external nature into a relatively benign quest for progress driven by a process of creative destruction and competition.

This is the promise of Western Individualism. Keeping our independence within a highly interconnected and evolving system we barely understand, emerging out of a ruleset we did not design, and maintaining our spirit of continuous, coordinated attempts to conquer our vulnerabilities and temporarily fortify and expand our position as cooperating individuals untill we eventually all succumb to the never-ending entropy of our hostile universe.

The idea of an all-powerful market without any rules and any political intervention is mad. Self-regulation is finished. Laissez faire is finished. The all-powerful market that is always right is finished.

Socialists of all stripes are of course rejoicing at the current bail-out antics. Unfortunately for them, it is yet another nail in the coffin not of the market, but of the idea of a “third way”. There is no third way. Central Banks + Fiat Money + Fractional Reserve Banking + Government Regulating + Government Subsidizing + Socialist Redistributionism through semi-market Institutions = recurring financial crises.

It is beyond me how anyone could call government-controlled money supply and a heavily regulated fractional reserve banking system with unregulated investment banks jumping in the gaps “laissez faire”. Unless you call letting government fuckups continue indefinitely “laissez-faire”, or perhaps, the unfolding of events in the world without ever increasing government power “laissez faire”.

The market does fail in one regard though: It does not understand itself and it is unable to defend itself. It is too decentralized to present a powerful defense, and the government-bureaucrat union members of the academic world nor the big business crooks are up to the task. The playing field is open for left-wing demagogues to take control. The 21st century USSA are one step closer.